A family that brings a son or daughter into the business could see its tax bill almost double in a single year under the government’s plan for family trusts, Australia’s peak small business body has warned.
Council of Small Business Organisations Australia (COSBOA) CEO Skye Cappuccio told the Senate Economics Legilsation Committee on Nov. 5 that the option the government offers small businesses to avoid its new tax was “too harsh for most businesses to consider.”
A family trust is a type of discretionary trust in which a trustee decides each year which family members receive the income, allowing flexibility in tax planning.
Trusts can opt out of the minimum tax by locking in fixed income and capital shares for nominated beneficiaries. However, changing those arrangements outside limited exceptions would trigger a 47 percent tax (the top marginal rate of 45 percent plus the 2 percent Medicare levy) on the trust’s entire net income for that year.
Costly if a Child Comes Home
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If they elected to pay themselves a fixed share, they would pay about $62,000 in tax, the same as today. But if an adult child comes home to work full time so one parent can go part time, the tax for that year would jump to about $117,500.
“For three adult family members that rely on trust distributions for living costs, that is a bill that can threaten the business,” the submission said.
Cappuccio told the committee small family businesses “are not often a steady ship,” and that families need to change how they share income as children join or a partner steps back.
Matthew Addison, former executive director of the Institute of Certified Bookkeepers and a COSBOA board member, said such a bill could be the end of a business that would otherwise have kept going.
Under the proposed legislation, the fixed shares can only be changed when a family member dies or a relationship breaks down, not when a child is born or a family member loses mental capacity.
‘Baking in Inequity’: Cappuccio
Cappuccio said the 30 percent tax would disproportionately affect lower-income families because it applies from the first dollar of trust income, whereas wage earners pay lower tax rates on the initial portion of their earnings.
With the Medicare levy, the real minimum is 32 percent, and she said an employee would need to earn “very close to $230,000” to pay that rate.
The council’s examples show a husband and wife sharing $200,000 would pay about $18,400 more a year, while a sole operator taking $32,000 would see their tax rise from $1,970 to $10,200.
“This particular approach is, in my opinion, baking in inequity,” she said.
Committee chair, Labor Senator Lisa Darmanin, noted that 85 percent of small businesses do not use a trust. She also put it to Cappuccio that every family in the council’s examples could take the election and keep paying the same tax.
Cappuccio agreed, but noted that such an arrangement would only work if the family’s circumstances remained unchanged.
“The status quo for a small family business is not usually that things don’t change. It’s usually that things evolve and change over time,” she said.
Scrap It, Small Businesses Say
The council wants the tax scrapped. Failing that, it wants businesses with a turnover of less than $10 million left out of the new rules.
Asked by Liberal Senator Jane Hume whether a one-year delay would help, Cappuccio said it would give businesses time to prepare, but was “just pushing the can down the road.”
“This is a bad tax bill, whether it comes in on the first of July, 2028, or the first of July, 2029,” she said.
